Thursday, January 17, 2013

Today's links

1--German Growth Goes Negative but Merkel’s Press Remains Glowing, Bill Black, naked capitalism
....
the gratuitous recession that Berlin is inflicting on Europeans is hidden by the journalist’s framing of the crisis as a mere “slowdown” and describing it as a “cloud.” Europe’s second recession, the Merkel recession, was made in Berlin. The NYT journalist reverses the facts in these three paragraphs.
“Within the region, Germany has served as a crucial counterweight to the struggling economies of Southern Europe, and helped to stabilize the euro zone as a whole.
The country’s economic might has also given Ms. Merkel an especially strong say in euro zone policy. Her clout and insistence on fiscal austerity in return for German financial support has often irked other leaders, but it has made her popular at home. She is an overwhelming favorite to win a third term in nationwide voting in September.
“Most of the decline can be blamed on weakness in the rest of Europe,” said Martin Lueck, an economist at UBS in Frankfurt. “Voters will not blame it on Ms. Merkel.”
The first paragraph takes Merkel’s propaganda and makes it a statement of “facts” that are so unassailable that they require neither reasoning nor citation. The actual facts are, as the article admitted in the first paragraph, that Berlin demanded the policies that took the “struggling economies of Southern Europe” and threw them into Great Depression levels of unemployment that are causing their university graduates to emigrate in droves. Berlin did not “stabilize the euro zone as a whole” – it threw it into recession. In so doing, it did not help ordinary Germans. German growth would have been far more robust but for their own austerity. It is no coincidence that German growth went sharply negative as soon as it balanced its budget. 

2---It's all about Israel, antiwar

And for those who still doubt that it is all about Israel, I would suggest a little history lesson. In 2004 Philip Zelikow, executive director of the 9/11 Commission, admitted that the Iraq war was fought to protect Israel, which he described as "the threat that dare not speak its name." He meant that if there had not been the connivance of the Pentagon’s friends of Israel in creating a false weapons of mass destruction narrative coupled with the fulsome support of the Lobby a war on behalf of Israel would never have been endorsed by the American people. And it is also useful to review what happened to the last brave soul who dared to put American interests ahead of those of Israel. That was Chas Freeman who was proposed as Chairman of the National Intelligence Council during President Obama’s first term in 2009. Freeman had an exemplary record as a public servant and was known to be an independent thinker willing to reconsider and challenge orthodox policies. Freeman had served as Ambassador to China and Saudi Arabia and was regarded as something of an Arabist, which immediately made him suspect to the usual crowd in congress and the media. For that he was immediately attacked by Israel’s friends, in what was described as a "thunderous, coordinated assault." The critics frequently pretended that they were actually opposing Freeman’s views on China and his close personal ties to the Saudis, just as Hagel is now being falsely pilloried because he lacks management experience and because his wartime service in Vietnam will color his judgments. But no one was really fooled regarding Chas Freeman – it was all about Israel. Freeman, realizing that the debate over his views would become a distraction, asked that his name be withdrawn.

3---Manufacturing in the Philadelphia Area Unexpectedly Shrinks, Bloomberg

The report follows New York Fed data released earlier this week showing factory activity shrank for a sixth straight month and raises the risk manufacturing, once a pillar of the recovery, will again weaken in early 2013. Looming changes in federal spending and stagnant prices give companies little reason to expand inventories, which may hurt manufacturers

4---Japan: The key to ending deflation is wage growth, Bloomberg

Ending consumer price declines would give companies and households more incentive to borrow, and boost revenue for businesses and the government in a nation that saw its third recession in five years in 2012. The danger: prolonged deflation has altered behavior across the economy, from entrenching declines in pay to driving more than half of savings into cash.
“The key is wages,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research and a former BOJ official in charge of price data. “Without pay increases, the economy won’t recover and households will only suffer from inflation.”

Stagnant Wages
While deflation helps savers, younger generations are hit by stagnant wages and diminished incentives for borrowing. Unemployment among those aged 15-24 was 6.5 percent in November, compared with an overall rate of 4.1 percent. Wages have failed to rise for nine of the past 12 months. About 56 percent of household assets were in cash or bank deposits at the end of September, according to a central bank report.
“Adopting the inflation target may widen the gap between rich and poor,” said Atago. “The rich have assets to invest to take advantage of a weaker yen, higher stock prices and yields. The poor will be the last to benefit, if ever.”

5---- Fed Concerned About Overheated Markets Amid Record Bond-Buying, Bloomberg

Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.

Investors have been snapping up riskier assets since the Fed boosted its bond buying to reduce long-term borrowing costs after cutting its overnight rate target close to zero in December 2008. Enthusiasm for speculative-grade bonds is at unprecedented levels, driving a Credit Suisse index that tracks the yield on more than 1,500 issues to a record-low 5.9 percent last week.
Now, as central bankers boost their stimulus with additional bond purchases, policy makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are on the lookout for financial distortions that may reverse abruptly when the Fed stops adding to its portfolio and eventually shrinks it.

“Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” George said in a speech last week. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.”
Bernanke himself raised that concern this week, saying the central bank has to “pay very close attention to the costs and the risks” of its policies during a Jan. 14 discussion at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. ...

Credit Easing

The Fed is purchasing as much as $85 billion a month of bonds, a pace that would balloon its balance sheet to more than $3 trillion by the end of this year. Bernanke calls his debt purchases “credit easing,” intended to push investors into riskier assets to lower costs for borrowers.
While the central bank has set no limit on the duration or size of its bond-buying, several Federal Open Market Committee members said at a December meeting it would “probably be appropriate” to slow or stop purchases “well before” the end of 2013 because of financial stability concerns.
The first sign of Fed tightening may set off a hair trigger in the bond market, said Drew Matus, senior U.S. economist at UBS Securities LLC in Stamford, Connecticut.
“There is no pulling back a little,” he said. When the Fed begins to shrink its portfolio, investors will start to price in the entire stock of bonds coming back into the market. “It is always going to be hard to disengage in a very gradual manner.”

6---The hidden costs from inflation in the housing market: 4 trends in the current housing market. Comparing nationwide trends and niche areas. Inflation adjusted home prices., Dr Housing Bubble

7---If You Remember Nothing Else About the Financial Crisis, Remember This, Jesse

8---Forecast 2013: Contraction, Contagion, and Contradiction, clusterfuck nation, Kunstler
The Current Situation

We're now entering the seventh year of a smoke-and-mirrors, extend-and-pretend, can-kicking phase of history in which everything possible is being done to conceal the true condition of the economy, with the vain hope of somehow holding things together until a miracle rescue remedy -- some new kind of cheap or even free energy -- comes on the scene to save all our complex arrangements from implosion. The chief device to delay the reckoning has been accounting fraud in banking and government, essentially misreporting everything on all balance sheets and in statistical reports to give the appearance of well-being where there is actually grave illness, like the cosmetics and prosthetics Michael Jackson used in his final years to pretend he still had a face on the front of his head.
 
 
Well it may look calm on the surface, but this latest move by the Bundesbank gives us a pretty good indication that beneath the surface that serene-seeming swan is paddling for dear life.
If you want a full analysis I recommend this excellent summary by Jan Skoyles. The scary part is this bit:
Every few months there is a discussion regarding what China are planning on doing with the gold they both mine and import every year, with many believing they are hoarding the metal as an insurance against the billions of US Treasury bonds, notes and bills they hold. Many believe they will issue some kind of gold-backed currency in the short-term and dump its one trillion dollars’ worth of US Treasury securities. Whilst, at the moment the US seem to take their monopoly currency for granted, should the Chinese or anyone else behave in such a manner, the US will need to respond – most likely with gold, which on its own it does not have enough of.
Anyone who thinks this isn't going to happen eventually should read Peter Schiff's parable How An Economy Grows And Why It Crashes. If something can't go on forever, it won't.

10---Gold and Economic Freedom, alan greenspan

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. ....

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value

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